China’s yuan is set for its worst weekly drop against the dollar since 2015, as investors rush back to the US

China’s currency has fallen sharply this week.Future Publishing/Getty Images

China’s currency, the yuan, was on track for its worst weekly drop since 2015 on Friday, with investors nervous about the economy and with Federal Reserve policy making Chinese bonds look less attractive.

The offshore yuan, also called the renminbi, traded at around 6.53 per dollar Friday, according to Bloomberg prices.

It had fallen roughly 2.4% since opening at around 6.38 a dollar on Monday. That put it on track for the worst weekly fall since early August 2015, when the government surprised markets by devaluing the currency.

The yuan has taken a pummeling as the US Federal Reserve has prepared to rapidly raise interest rates in response to red-hot inflation. US bond yields have rocketed as investors have demanded a higher return on their investments to reflect the rise in interest rates.

The pick-up in US yields has in turn made Chinese securities look relatively less attractive, driving investors to sell the yuan. The dollar index, which measures the greenback against a basket of currencies, has risen roughly 2.7% over the last month to 100.93.

“In China, the yuan sell-off is threatening to become somewhat of a rout,” said Jeffrey Halley, senior Asia market analyst at currency firm Oanda. “The price action this week suggests that foreign money leaving the China equity and bond markets is in danger of becoming a flood.”

China’s economy is also a concern, analysts said. The government’s strict zero-COVID policy has led to lockdowns in cities such as Shanghai, and Russia’s invasion of Ukraine has further clouded the outlook.

The International Monetary Fund downgraded its economic growth forecast for China to 4.4% this year, having expected growth of 4.8% in January. It cut its US growth forecast by 0.3 percentage points to 3.7%.

Story continues

China’s yuan, or renminbi, is closely controlled by the country’s central bank. The People’s Bank of China sets a point each day for the onshore yuan — that is, the currency traded within the country — and allows it to move 2% in either direction. The offshore yuan is influenced by the onshore currency, but is free-floating.

The PBOC on Wednesday set a lower-than-expected fixing for the onshore yuan, a move which analysts said could boost Chinese imports by making them cheaper in relative terms.

Craig Botham, chief China economist at Pantheon Macroeconomics, said he expects the currency to weaken further as growth slows in the second quarter.

“We expect the renminbi to hit 6.8 to the dollar by year-end, with risks chiefly to the downside,” he said.

Read more: Stagflation risk is soaring, according to 3 top strategists at a $950 billion asset manager. They explain why some stocks are still attractive — and share 4 ways to prepare a portfolio for the looming combination of high inflation and sluggish growth

Read the original article on Business Insider